What is Eigen, what is re-staking, what is liquid staking, what is liquid re-staking?
What are the risks? (Its a long read, its well researched and not just FUD)
To start, every project and token that falls into this category is made for one thing, regardless of what they sell it as, they are made to offer higher yields on staked/locked funds.
If managed well this offers crypto investors better returns and it offers new projects a source of funding and security, if not managed well it creates the perfect environment for a Ponzi scheme.
This has been done before, billions have been scammed using this higher yield trap before (bitconnect, Celsius and many more)
I had originally intended to post this as one article but its to much information.
I want my posts to be helpful to all, this post might seem pointless or pointlessly long but you need to understand the steps along the way and how risk increases at each step.
This research is the result of asking someone with mild OCD and many crypto trust issues about the same projects all the time🤔
I get asked a lot about projects, many of these projects are re-staking or projects further up the risk scale.(liquid re-staking)
Some of these projects on Binance include,
Omni, Renzo, Ether.fi, Altlayer, Pendle, Celo, LDO, Lista
There are far far more not listed on Binance, also for the purpose of these posts i am focusing on projects related to ETH
Even if you don’t hold any re-staking or Defi projects in your spot portfolio this still effects you, more and more crypto projects are investing funds into Eigen, re-staking, liquid staking and it will just keep growing.(So will the risk)
Understanding this space is key, it could be the next huge advancement for Crypto(and money making opportunity) or lead to the next market crash.
This took me weeks of research so hopefully i can try summarize and explain in a user-friendly way.
There is no point explaining Eigen if you dont understand Ethereum, Slashing, LSTs and so on, by the end of this hopefully you will.
You need to understand how your funds go from Fiat-> Crypto -> Staked -> Liquid staked -> re-staked -> liquid re-staked.
You need to understand this because at each step the risk goes up, also how long(days,weeks,months) it could take to get your crypto back into self custody or withdrawn to fiat.
I have tried to keep this as simple and easy to understand as possible.
Included in Part 1,
-Understand the Ethereum blockchain
-Understand Slashing
-Understand Lido
-Understand what is an LST/LSD (not that LSD, get help😂)
Lets start,(Good luck)
Ethereum,
Ethereum 2.0 is a proof of stake consensus blockchain.
ETH is staked by validators to maintain, secure the network.
Validators are entrusted with the tasks of attesting and proposing blocks, they are essential for maintaining the network’s smooth operations and security.
Staking 32 ETH is required to become a validator.
Currently ETH has over 1 Million validators and nodes, over 32 million ETH staked with a value of over $115 Billion.
An ETH node is the computer that runs the ETH client software, it is connected to other nodes on the network.
The 32 ETH staking requirement is so validators are financially invested in securing the blockchain, if they misbehave they are at risk of being slashed.
Slashing is extremely important to understand for staking and especially re-staking.
Slashing is the process of penalizing validators for misbehaving or not performing their duties correctly.
Slashing can result in the loss of some or possibly all of your funds, the average is 1.08 ETH/32ETH, the possible risk of total loss is only applicable to stop a coordinated attack by a large number of validators.
Slashing rarely happens due to a malicious acts, it happens mosty for reasons like power outages, hardware problems or simple human error.(If a node is offline and does not perform its task, this is a slashable event)
If a Validator is slashed they are removed from the validator set for 36 days, they can not validate or earn rewards for this time.
Ethereum is so secure because of this risk-reward system, it is far to costly to act in a malicious way.
ETH Validators earn between 4-6% APY(Annual Percentage Yield)
APY is the annual percentage yield earned for staking, it includes compound interest, in crypto it varies based on price and the period your funds are locked into staking.
ETH Validators funds are locked during staking (Without Eigen) , they can not be used for trading or anything else while staked.
Lido DAO
My explanation into Lido for this article only refers to ETH, Lido offers many different LSTs on different chains, i have included images at the end which shows this.
About Lido,
Lido is a DAO (Decentralised autonomous orginization)
Simplified a DAO is not controlled by any single entity , it allows governance by the community.
Lido’s native token is LDO , LDO serves as the governance token for the Lido DAO, it is used for community voting rights on the network.
There are many other projects like Lido, Lido is by far the biggest (potentially poses the most risk)
Up to 35% of the $115 Billion staked on ETH has been staked through Lido in the past years.(This can matter)
Lido is not a custodial solution, they do not take custody of ETH staked through their protocol.
Lido directs end users ETH, on chain, through smart contracts, via nodes, to validators, the ETH is always self custody.
So what does Lido actually do ?
If, like me, you dont have a spare 32ETH laying around to become and ETH validator then you can use a liquid staking protocol like Lido.
You can take your 0.1 ETH and stake it through Lido for staking rewards, they pool all our poor people funds together 🥺 and use that to fund trusted validators and node operators on the ETH network.
The validators do all the hard work, they have the hardware(Nodes), they get 4-6% APY, Lido takes 10% (split between validators and Lido DAO), you get 90% of the APY reward.
But wait theres more,
Not only can you be included in the staking rewards, you can also use that money while its locked in staking.
To put this very simply,(Sorry for anyone who already knows this)
If you have ever seen your favorite cryptocurrency but it has wierd letters infront of it (stETH, wETH, rETH) and you didnt understand why then let me explain, these are LSTs(Liquid stake tokens), they come in many variations but oversimplified they mean the same thing.
An LST is just a token to represent the staked asset.
If you have 0.1 ETH and you stake it through Lido they will give you 0.1 stETH.
stETH has the value of ETH(usually within a few dollars)
With that stETH you can now do what you want, you can trade, convert it, you can use it across Defi, your (Native) ETH is still earning you staking rewards with Lido.
When you want your ETH + APY rewards back, you return the stETH to Lido, they burn the returned stETH and they return your ETH and rewards, circle closed.
If you don’t return the stETH you cant get back your ETH+rewards.
This is a very simplified explanation, there are other ways to redeem, insure , leverage your Liquid staked tokens, they add to the risks which i will go into in part 2
Many in the crypto community feel that Lido is a threat to ETH and to the networks decentralisation because they control so much of the staked ETH supply.
Many feel it allows Lido funded validators a way of manipulating the ETH network to get more MEV(Maximum extractable value)
Oversimplified it means validators can manipulate the order of transaction in blocks they create for more profit. Basically it would be like paying security(ETH Validators) at a nightclub money to skip the queue.
Each blockchain has certain threshholds that allow more and more control, at 33% validators can slow down a network, at 51% they could fork a network, at 66% they could double spend, stop or reverse transaction.
Lidos dominance has fallen in recent times with more and more projects entering this space, projects like Eigen.
Many in the crypto community are happy about this decrease in dominance.
Any project or single entity that controls enough staked funds will always pose a risk.
Many other Liquid staking DAOs have voted and agreed to cap their maximum supply, this is for the decentralisation and safety of the blockchains.
In 2022 the Lido DAO had a vote and voted against a cap in their staked ETH supply.
The Lido DAO feel it is far safer to have this control in the hands of a DAO which is controlled by a large community, they feel this poses less risk than allowing a single entity, CEX or fund to gain this control.
Lido so far has been run in a sensible way and not posed any major risks, i am using Lido as an example because in the future other projects might own enough staked funds and might not be run with the same integrity, projects like Eigen.
End of part 1😅
Understanding all of this is crucial to understanding part 2, maybe now you understand why i split this post into 2 parts (This was the easy part 😳)
Many of the risks i talk about in part 2 will only make sense if you understand how Ethereum, Slashing and Liquid tokens work.
If you have any questions please ask, i have simplified this so it is user-friendly, if you want a deeper explanation about anything just ask.
In part 2
I will discuss Eigen in length, i have done a lot of research into it.
I will discuss the controvery surrounding Eigens launch, Airdrop, insider trading and pro VC policy.
I will explain how staked, liquid staked funds are used through Eigen and the increased slashing risks.
I will explain how if not managed correctly, Eigen could lead to mass manipulation and collusion for higher yields.
I will explain how liquid re-staking works (Renzo,Etherfi)
I will highlight high APY scam risks.
If you made it this far congrats🤙
If you found this helpful and informative a like, comment is always appreciated.
I write and research all my posts, i stand by what i post, that being said if i missed something or someone has anything to add i would be happy to learn and confirm/update the post.
Thanks for reading
Peace.
A list of LST projects on Ethereum 👇(There are far far more across other chains)
Lists showing the vast amounts of LSTs across mutiple chains👇, i tried to include the link but it was not supported.
#ListaMegadrop #altcoins #IntroToCopytrading #TheWolfThatWins
